What Is Simple Interest and How Is It Calculated?
Simple interest is interest calculated only on the original principal of a loan or deposit, ignoring any interest that accumulates along the way. Unlike compound interest, the interest amount stays the same every period, which makes the total cost of a simple-interest loan easy to predict from day one.
The formula for simple interest is I = P × r × t, where I is the interest earned or owed, P is the principal (starting amount), r is the annual interest rate expressed as a decimal, and t is the time in years. The total amount repaid or received is A = P + I, sometimes written as A = P(1 + rt).
According to the Consumer Financial Protection Bureau, most auto loans, many personal loans, and short-term promissory notes use simple interest rather than compound interest, which is one reason simple-interest loans are generally easier for borrowers to understand and budget for.
How to Use This Simple Interest Calculator
Enter your principal, annual interest rate, and time period, and this simple interest calculator updates the interest and total amount instantly. Here's what each field means:
- Principal Amount: The original sum of money loaned, borrowed, or deposited — before any interest is added.
- Annual Interest Rate: The yearly interest rate as a percentage, e.g. 6% for a typical personal loan.
- Time Period: How long the money is borrowed or invested for. This calculator accepts years, months, or days, and converts the time into years automatically for the formula.
This calculator works with any currency and any time period, so it is equally useful for a five-year auto loan in US dollars or a six-month personal loan quoted in pounds, euros, or any other currency.
Simple Interest vs. Compound Interest: What's the Difference?
Simple interest grows in a straight line because it is always calculated on the same original principal. Compound interest grows faster because each period's interest is added to the principal, so future interest is calculated on a larger balance — often described as "earning interest on interest."
The table below shows how $10,000 at a 5% annual rate grows differently under each method over time. The gap widens every year, which is why compound interest favors savers and investors while simple interest favors borrowers.
| Years | Simple Interest Total | Compound Interest Total (Annual) |
|---|---|---|
| 5 years | $12,500 | $12,763 |
| 10 years | $15,000 | $16,289 |
| 20 years | $20,000 | $26,533 |
| 30 years | $25,000 | $43,219 |
Frequently Asked Questions About the Simple Interest Formula
What is the simple interest formula?
The simple interest formula is I = P × r × t, where P is the principal, r is the annual interest rate as a decimal, and t is the time in years. For example, a $10,000 loan at 6% for 3 years accrues $10,000 × 0.06 × 3 = $1,800 in interest, for a total repayment of $11,800.
How accurate is this simple interest calculator?
This calculator applies the standard I = Prt formula exactly, so results are mathematically precise for any loan or deposit that genuinely uses simple interest. It does not account for fees, taxes, or compounding — if your loan or account compounds interest, use our Compound Interest Calculator instead for an accurate projection.
What is the difference between simple interest and compound interest?
Simple interest is calculated only on the original principal and grows at a constant rate each year. Compound interest is calculated on the principal plus all previously accumulated interest, so it grows faster the longer the money is invested or owed — the difference becomes significant after 10 or more years.
Which loans typically use simple interest?
Most auto loans, many personal loans, and short-term promissory notes use simple interest, according to the Consumer Financial Protection Bureau. Mortgages typically use amortized interest (a form of compound interest applied monthly), and savings accounts and credit cards almost always compound.
Learn More About Interest Calculations
If your loan or investment compounds interest instead of using simple interest, our Compound Interest Calculator will give you a more accurate projection.